‘Self-employed’ is a term generally associated with anyone who doesn’t hold down an office job with regular hours. In this sense, it includes home-based employees and freelancers. To avoid confusion and to serve the purpose of this article, let’s identify the self-employed individual as someone who owns and runs their own business, in whatever that might be.
Perks of the self-employed
There are definite perks to running your own business. Whether you sell products or offer a particular service, you are your own boss. You work on your own time and are in control of every aspect of your enterprise. You can design operational processes and decide who to hire.
Profit? You get all of it of course. You are your own employer so you reap financial benefits from the money that the business makes.
Tax hurdles and such
Being self-employed may prove advantageous in most areas. However, this isn’t usually the case when it comes to financing a home purchase. Income verification is an essential step in the underwriting process. The lender seeks to find out if you have the financial ability to repay the loan based on the supporting paperwork. A tax form is a document that gives the underwriter an insight as to what your income is really like.
Submitting tax forms can be tricky when you’re self-employed. Normally, taxpayers have a tendency to maximize their deductions. This strategy doesn’t work well for business owners or freelancers because more deductions mean less income. And less income may reduce your chance of being approved to borrow a specific amount of money.
What options are there?
There are a number of ways to get around the dilemma above.
- Leave some deductions on the table
To better your chances for a home loan, leave some of those business-related expenses on the table. Not declaring each and every bit of cost incurred in running your business keeps the income stated on your tax form within a reasonable amount. Find information for filing taxes as a self-employed individual here.
- Look into home loans requiring alternative documentation
Barely verified mortgage applications are a thing of the past. But some lenders are offering alternative products to the self-employed borrower. Collectively, they are known as non-qualified loans. Unlike traditional loans, these financial products are more flexible when it comes to paperwork. In some cases, little to no down payment is required.
One product in particular, the stated income loan, allows you to put down your income on the application form but doesn’t necessarily request tax forms and paystubs.
Browse through this website to learn more about stated income loans. Or talk to one of our lenders.